House Passes Tax Cuts and Jobs Act



A few moments ago, the House passed the Tax Cuts and Jobs Act of 2017. It passed by a vote of 227 to 205, and with mixed feelings, I voted yes. In some measure, I did so as a vote to continue the process because many Republicans from Northeastern states want to keep the tax exemptions currently favorable to high tax states – and for the process to continue, my vote was needed. At another level, I did so because I believe I was elected to limit the size and scope of government – and limiting taxes and spending are close proxies in efforts to do so.

It was indeed because I believe in limited government that I voted no on the budget a few weeks ago. This year’s budget proposed increased spending over the next year…and the 10 years contemplated in the budget itself. And that’s hardly a formula for limited government and the individual freedom that comes with it.

So, the yes vote allows the process to continue and is consistent with the fact that I have always voted to reduce taxes when given the choice. It’s my hope that the Senate measure – and the Conference report that will follow – refines and improves this bill passed today. I will make a decision on that Conference report as it comes our way, likely in December.

The bill is a mixed bag, and it’s for that reason groups like the Realtors, Homebuilders, and others back home have come out against it. But even with its detractors, I believe the bill does more good than bad and for this reason voted to support it.

Let me list the things I liked and those I did not.

PROS:

American Competitiveness — The bill has been described as comprehensive reform. It is not that. Fundamentally, it is a corporate tax cut and reform bill. Indeed, of the $1.5 trillion in anticipated cost, in broad strokes, $1 trillion of the benefit accrues to the corporate side while about $300 billion goes to individual tax reduction and the last $200 billion goes to estate tax reduction.

One can argue for or against this distribution of tax benefit, but from the standpoint of raw competitiveness of the American society versus others around the world, this bill moves us toward being more competitive. Over the last ten years, industrialized countries have moved their rates down to the point that America’s marginal corporate tax rate is the highest in the world. Ireland has moved theirs to 12.5%, while Canada has moved its to 15%, and both have seen substantial capital inflows as a consequence. The industrialized average on corporate tax rates is now 23%, and this bill moves us from 35% to 20%. Lowering corporate rates is in fact a bipartisan idea. Senator Ron Wyden, a democrat from Oregon, has proposed doing this for the last seven years.

It would also move us from a global corporate tax system to a territorial one, which aligns with the way that most other countries tax corporate earnings. Our not addressing these two things has driven companies like Johnson Controls, Burger King, and a long list of other long-time American companies to move their corporate headquarters overseas. This bill attempts to rectify this and is the main selling point of my reading of the bill. It certainly does other things like full expensing at the corporate level, but at the end of the day, these are features rather than the main benefits of what this bill offers.

Fewer Individual Tax Brackets — On the individual side, the bill eliminates things like the Alternative Minimum Tax while attempting to broaden the tax base by eliminating exemptions and deductions that allow the House bill to move us from 7 tax brackets down to 4. All this is done under the name of tax simplification. But when you really begin to get into the details of things like small business pass-through income requirements, you’re struck by the fact that if this is simplification, then I would hate to see complication.

Estate Tax Reduction — In the same vein, the bill’s efforts to eliminate the estate tax are mixed. The bill doubles the estate tax exemption for the next six years, and I think a doubling of this exemption is good and reasonable. On the other hand, the bill then eliminates the estate tax in 2025. What this means in plain English is that the bill raises the estate tax exemption. Period. And not more than that.

Given that no Congress can bind another Congress, I would find it hard to believe that a future Congress would somehow muster the political courage to say that Jeff Bezos ought to be able to hand off his $94 billion estate tax-free to his kids and grandkids – when this Congress won’t. In short, certain sections of the code like this were gamed rather than really dealt with. In some cases, this was for political purposes; in other cases, it was to affect the scoring cost of the bill itself.

But the long and short of this is that the bill has features in it that would appeal to an array of taxpayers and indeed proposes some form of tax cut for eighty percent of the tax filers.

CONS:

Raises the National Deficit — One, I don’t like what this bill does to the deficit. To be clear, you can’t have a tax cut and have revenue neutrality. And if you really believe that government should be smaller, then cutting both spending and taxes are essential. The catch here is that Congress oftentimes has voted for one but not the other, but I can only control the one vote that I have been vested with by people at home. And I’ve consistently voted to do both.

Many people in the debate that has occurred have been 100% disingenuous on this point, as they have found newfound religion on the importance of avoiding deficits. Some of these folks in fact have been some of the biggest spenders in Congress – and how they now make their argument as they do is just a touch curious…but politics are politics.

Here is the conundrum on this point. If we do nothing, our debt-to-GDP numbers are projected to continue to rise dramatically over the next ten years from 77% today to 91%. It was 35% as recently as 2007. With this tax bill, it would rise another 5% to 96%. In short, we are in real trouble either way if we have not done something material to cut spending and to increase economic growth. The bet on this bill is that it will help with the latter. It is not a guarantee but an educated bet. More optimistically, some point to the fact that tax extenders, which would largely go away with any tax reform measure, account for $450 billion in cost of the bill. When combined with the one trillion in economic growth groups like the Tax Foundation believe would come with this bill, they believe we can get much closer to parity in the bill’s effective cost over the next ten years.

My reasoning goes with the first argument rather than the second, as I was taught a long time ago in business to focus on downside rather than upside in looking at budget forecasts.

One last point here on the relative weight of taxes versus spending going forward in solving our deficit problem – and it reinforces how important cutting spending will be. On average, the federal government has brought in about 18% of GDP in taxes. This has been remarkably consistent – regardless of tax rates. Sometimes high rates, other times low rates…but always about the same take to government. In short, you can only squeeze but so much juice from a lemon. On the other hand, spending has risen steadily during those same years. Today, we are at about 20.7%. It takes no mathematician to recognize that if you take in 18 but spend 20, you have a problem. What this tax bill would do is to leave us within 1% of our historic norm on taxes. Meanwhile, spending is projected to rise to 23.4% over the same ten years….about 3.5% above what we have been doing.

Skin in the Game — Two, it takes people off the tax rolls. I know this has been sold as a feature of the bill, but I think it’s a mistake. I believe that there is a value to people looking at their tax return at the end of the year and asking whether or not they got their money’s worth. There is a value to having all Americans with skin in the deal on whether or not their government is working. We’re getting dangerously close to a tipping point in our society wherein more people get from government than give to government. And what we do by taking more people off the rolls is to give them reason to be unlimited in their demands for government since they’re not tangibly paying part of the freight of the cost of the government from which they benefit.

Lack of Universal Individual Tax Cut — Three, while giving to corporations a windfall with things like full expensing, which from a scoring standpoint is very costly, the bill actually raises the tax load on some individuals. This seems a bit crazy to me. I don’t like some rich folks any more than the next guy, but it needs to be recognized that we have a progressive tax system, and as you go up the income tax scale, you pay more. In fact, the top 10% of earners in America pay 70% of the income taxes in our country.

Many of these folks in this group aren’t exactly rich since the top 10% in America begins at a family income of $133,000. That means a school teacher married to a truck driver could find themselves indeed in the top 10%. What Republicans have done here is to continue down this line of class warfare that I think is counterproductive. The bill does deliver tax relief to about 80% of those who have filed (and this has been noted by even the Washington Post), but the Joint Committee on Taxation estimates that the bill will mean a tax increase for 8.3% of taxpayers in 2019 and 22% of taxpayers by 2025. This is flawed. If we’re going to go down this route of alleged tax reform, then it would seem reasonable to me that all people would get some degree of tax relief as opposed to government penalizing some who are very productive in our society.

Hardly a Simplification — Four, while the bill does eliminate some exemptions while reducing the number of tax brackets, this is hardly the simplification that you would see in a Fair Tax or Flat Tax proposal. I think the worst of these areas is with small business treatment wherein there is a very complicated 70-30 split on income. I’ve heard from many people at home concerned about the way in which the formula would work – because it could advantage the investor in a small business over the owner/operator. This part of the bill needs much more work.

I have a host of other thoughts, but I know my analysis is getting long in the tooth. Accordingly, I will call it quits. But I want to leave you with this. I am committed to votes that will improve the lives of people along the coast of South Carolina and across the country at large. After one includes everything from advancing the process to how to close part of our budget deficit with growth, I believe the bill narrowly comes up with more positive than negative in improving the lives of those I represent. There is still more work to be done on this bill, and for this reason, I will be working where I can to improve it. No Representative has complete control over a bill like this, but I was part of a group that pushed very hard against the idea of a border adjustment tax as this bill was getting rolled out – and our collective voice was instrumental in eliminating that provision of the bill. I will look for more opportunities to further refine this bill.

More than anything, I would love to get your thoughts on this tax proposal and what should come next in the Senate and Conference reports.

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